After demonetisation, liquidity crunch may inflict more pain on real estate sector: Experts

Two years ago, demonetisation caused upheaval in many sectors and the real estate sector also had to bear the brunt.

The analogy was that the much diabetic sector required insulin (demonetisation) injections after which it was constantly monitored on the treadmill through measures such as amendments to the Benami Transactions (Prohibition) Amendment Act 2016, Real Estate (Regulation and Development) Act (RERA) and the Goods and Services Tax (GST).

The maximum impact of demonetisation was felt on land and luxury residential segments where prices had corrected by almost 30 per cent as these were the asset classes where maximum investors were seen to park black money. But sales started to pick up on the back of affordable housing launches, especially the government’s impetus on Housing for All by 2022 and the Pradhan Mantri Awas Yojana scheme.

When it seemed that the pain was more or less reduced with these measures being in place and real estate prices getting rationalised, the recent non-banking financial company (NBFC) crisis, triggered by the debt-pile in IL&FS, and the cascading impact on several NBFCs, caused a stir in the residential markets. Instead of ‘insulin injections’, the sector now requires a ‘booster’ dose of liquidity from the government, say experts

Preceding the recent financial turmoil, a wave of structural reforms had swept the real estate landscape. “Just as the market appeared to be gaining some strength, the aforesaid financial shake-up has caused a rewind-like situation amongst the financial community,” said Arvind Nandan, Executive Director – Research, Knight Frank India.

The NBFC cash crunch has had a cascading impact on the somewhat improving residential real sector. “This is primarily because for last few years, developers had been availing term loans from NBFCs and Housing Finance Companies (HFCs) and any turmoil in the latter is bound to impact the Indian realty industry. Further, at a time when the festive season fervour and loan melas are expected to boost residential market sales, the state of financial markets is likely to play a vital role,” he explained.

Post-demonetisation, land prices that were inflated due to black money deployment had come down drastically, corrected by almost 30 to 40 percent. Prices of luxury real estate projects corrected by 30 percent and there was no appreciation for almost three years. “Today, the sector is suffering from a new ailment (liquidity crunch) post the NBFC crisis. Earlier, an insulin injection of demonetisation was required to reduce the deployment of black money in the sector. Now we need a booster dose of liquidity from the government,” said Pankaj Kapoor of Liases Foras, a Mumbai-based real estate rating and research firm.

The next steps should include rationalisation of tax structure and stamp duties and electronic registration of properties. While GST on affordable housing has been reduced to 8 percent, for other properties, including under construction projects, it is still 12 percent. This, say experts, is an impediment for home buyers who are preferring to buy ready-to-move-in properties that do not attract GST.

“The government must look at rationalising GST. Stamp duties and registration should also come under the ambit of GST. The government should consider tax incentives for real estate developers who construct buildings faster and introduce a vacant land/inventory tax,” said Kapoor, adding this will help boost the economy and the real estate sector at large.

Samantak Das, chief economist and head – Research & REIS at JLL India, is of the view that the impact of “demonetisation is behind us. While the sector is still getting used to regulatory framework of RERA and GST, after the NBFC crisis, the problem that the sector is now facing is to do with cash flows. There is pain in terms of cash flows. Private equity funds have also become cautious and their cost of capital has gone up slightly,” he said, adding the problem may plague the sector for a quarter or two.

“Down the line one will also see many global warehousing players investing in the country. There is a perceptible shift from unorganised to global players. This may also help boost the market,” he added.

Finance Minister Arun Jaitley said demonetisation resulted in formalisation of economy and increased tax base, prompting the government to earmark more resources for the poor and infrastructure development.

In a Facebook post on the second anniversary of Demonetisation, Jaitley said in first four years of the National Democratic Alliance (NDA) government, the number of income tax returns filers has gone up to 6.86 crore from 3.8 crore in May 2014.